Record-high corn prices slow ethanol expansion

Record-high corn prices, among other market conditions, have ethanol producers slowing expansion and analysts crunching numbers to find the industry's break-even point.

On Monday — the eighth consecutive day that corn prices set a record — major ethanol producer VeraSun Energy Corp. said it will delay starting two nearly complete ethanol plants "until ethanol market conditions improve," spokesman Mike Lockrem said.

The price of corn for July delivery jumped Monday to an all-time high of $7.60 a bushel on the Chicago Board of Trade before falling back to settle at $7.325 a bushel. By midday Tuesday, the July corn contract traded at $7.37 a bushel.

Analysts, meanwhile, have begun calculating price scenarios under which ethanol production might become unprofitable.

"We believe these (corn) prices, if sustained, could pressure weaker producers to reduce or eliminate production," Oppenheimer & Co. analyst Joseph Gomes Jr. said Monday in a client note.

In a telephone conversation Tuesday, Gomes cautioned that there is no set price for corn that will automatically mean ethanol production is unprofitable.

"There's a ton of moving parts here that make it difficult to say that at this price ethanol producers start losing money," he said. "If the price of ethanol doesn't rise, the price of corn is going to negatively impact a lot of these guys."

However, VeraSun's delayed opening of its two plants is also significant, he said.

"That may be an indication that we are at a tipping point, that adding capacity may start to be put aside due to high corn prices."

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One scenario developed by Gomes finds a nominal ethanol producer's break-even point at corn selling for $7 per bushel. Beyond that, losses begin.

To reach that conclusion, Gomes assumes a 100-million gallon plant that is 60 percent financed at 8 percent interest, with a natural gas cost of $12 per million cubic feet, a distillers grain price of $180 per ton and an ethanol price of $2.80 per gallon. Distillers grain typically comprises about a third of the production from ethanol plants, with ethanol making up the rest.

A spokesman for the ethanol industry trade group, the Renewable Fuels Association, cautioned against using a one-size-fits-all approach to locating the industry's break-even point.

"It really is a plant-by-plant dynamic. There are a million moving parts," said Matt Hartwig.

In early afternoon trading, VeraSun lost 2 cents at $4.56. Pacific Ethanol rose 11 cents, or 4.6 percent, to $2.53. Aventine Renewable Energy fell 10 cents, or 2.1 percent, to $4.59. Archer Daniels Midland rose 68 cents, or 2.1 percent, to $33.28. Biofuel Energy fell 9 cents, or 2.7 percent, to $3.23.